China’s premier has threatened Japan in an escalating row over disputed islands in the East China Sea. This dispute has already caused high-level government contacts to be frozen, and has dragged pop stars and pandas into the wake.

Speaking Tuesday night in New York, Premier Wen Jinbao said, “If Japan acts willfully despite advice to the contrary, China will take further actions and Japan must accept full responsibility for all the severe consequences.”

The bitter diplomatic confrontation started with a maritime collision involving a nondescript blue Chinese fishing boat. In waters near the disputed islands earlier this month, it collided with two Japanese coast guard vessels. The captain remains in Japanese custody.

This small bust-up has spiraled into this high-level standoff, centering on claims to the uninhabited but resource-rich islands. Even their name is a matter of dispute; they’re called Senkaku by Japan and Diaoyu by China.

Twice in the past three weeks, small protests have taken place in front of Japan’s embassy in Beijing. It’s significant these demonstrations are being allowed at all in the Chinese capital.

The Chinese protesters sing the national anthem, a reminder that rising nationalism born from China’s century of humiliation underlies their anger.

“I want our government to be stronger,” said a protester who gave his name as A Min.

He was trembling with anger as he spoke. “They shouldn’t let the Japanese bully us on our own soil. The Diaoyu islands have always been ours. Young Chinese people shouldn’t forget the humiliations of history, and shouldn’t allow history to repeat itself.”

Protests were held last weekend on the 79th anniversary of an incident that led to Japan’s brutal occupation of northeast China.

China has suspended ministerial contacts, and China-Japan talks on aviation issues have been called off.

Non-official contacts are also suffering, with China refusing to allow 1,000 Japanese students to visit the Shanghai Expo on a bilateral exchange and calling off a Japanese pop concert in Shanghai.

Beijing also sent a team of investigators to Japan to examine the death of a Chinese panda there.

“The Japanese government is clearly upping the ante,” said Zhou Yongsheng, an international affairs professor at China’s Foreign Affairs University, the alma mater for many of its diplomats. “Before, Japanese coast guard vessels expelled Chinese fishing boats. But it’s the first time Japan has captured mainland fishermen, and collided with a Chinese boat.“

For its part, Japan’s government spokesman Yoshito Sengoku has warned against stirring up “narrow-minded, extreme nationalism."

As chief Cabinet secretary, he has also called for high-level talks on the issue. But Tokyo insists the islands are an integral part of Japanese territory, and the recent appointment of a new hawkish foreign minister, Seiji Maehara, may also complicate the issue.

The dispute comes amid increasing Chinese assertiveness over its maritime claims. This test of wills between the region’s rising power and its waning one has consequences.

Koji Murata, a professor of political science at Doshisha University in Kyoto, says he believes Japan’s reaction will define the bilateral relationship.

“Japan is reasonably reacting to China,” Murata said. “But the Chinese reaction is extremely emotional and aggressive. If we do compromise to China in this case, we have to compromise to China again [and] again [and] again [and] again.”

He says this episode is likely to drive Japan closer to the United States. There are other implications, too for the U.S.; under the Japan-U.S. security pact, Washington is obliged to defend Japan in the event of conflict.

Almost no one believes the dispute could get that far, especially given booming economic ties between Tokyo and Beijing. But Jia Huixian, an international affairs expert at Peking University, says part of the blame belongs to the U.S.

“After Japan’s defeat, Taiwan, Okinawa and the Diaoyu islands were placed under the temporary administration of the U.S. Then in 1970s, the U.S. gave the Diaoyu islands to Japan, making Japan believe the islands belonged to them. So because of this, I think the U.S. is also responsible for these problems,” Jia said.

The big question remains, what will happen next? Japan can hold the Chinese ship captain only until Sept. 30, when he must be either indicted or released.

It’s not yet clear what “strong countermeasures” China will take, but nationalistic Chinese are already calling for military drills in the disputed area.